The ongoing conflict in the Middle East and the Strait of Hormuz closure have triggered a dual shock of higher energy prices and supply disruptions to the global economy, including India. After over four weeks of hostilities, tentative US–Iran negotiation signals have emerged, though the path to resolution remains highly uncertain.

India enters this shock from a position of relative strength, with record FX reserves, ~74 days of combined crude and petroleum products storage, strengthened banking sector and corporate balance sheets, and declining energy intensity. Prior to the conflict, the economy was in a “Goldilocks” phase of resilient growth and contained inflation. That said, high energy import dependence and heavy reliance on GCC suppliers amplify India’s vulnerability to energy price and supply shocks.

The duration of the conflict remains the critical variable. A short-lived disruption would leave the macroeconomic impact moderately negative and manageable; a prolonged conflict would deliver a material stagflation shock. Under our base case (crude oil price averaging ~USD 85/bbl in FY27), we project real GDP growth moderating to ~7.0% and CPI averaging ~4.3% in FY27, from expected 7.4% and 2.1% respectively in FY26. The government is taking steps to shield the domestic economy through energy supply diversification and excise duty cuts, though these alongside likely higher fertiliser subsidies will place the FY27 estimated fiscal deficit target of ~4.4% of GDP under meaningful pressure. The RBI is expected to hold the policy repo rate at the April meeting, though our conviction on an extended pause has reduced as any prolonged energy price elevation could necessitate monetary policy tightening.